Mid-Life MBA: The Art of Business

While the running of the bulls in Pamplona occurs in July, the American bulls often begin their state-side run each November. 

With the DOW up .95% at the close of today we may just be in for a terrific end of year rally.  Yahoo finance reports that over 70% of the 150 S & P 500 companies reporting end of quarter earnings have reported in the double digits.  Today’s shining star was WalMart, up 3.7% after its announcement that it will significantly trim back capital expenditures.

The BBC reported today that the listing of the first Vietnamese Bank on the Vietnamese exchange has lifted the country’s stock market by half. They said, “Sacombank – or Saigon Commercial Bank – debuted with a market capitalization of almost $1bn, and is by far the biggest company on the exchange.” 

The securities market in Ho Chi Minh City lists just 41 stocks but the addition of Sacombank has increased the total value to $3 billion.  Vietnam’s banks are readying themselves for the arrival of multinationals which are held at bay presently by stringent restrictions on foreign ownership.  Restrictions are expected to ease considerably with a change in rules once Vietnam is admitted into the World Trade Organization later this year.  In the past year the Vietnamese market has been the top performer in Asia with a gain of 60%.  Some of the credit for Sacombank’s emergence from the pack must be given to its recent partnership with Australia’s, New Zealand Bank.

Despite reports on inflation and the looming Fed increase the dow bounced back 110 basis points today.  I wish the economic indicators were substantial enough to point to more than a sucker’s rally but in my opinion they do not.  Even the WSJ reported the one day upturn in terms of disbelief, “Stocks advanced Wednesday, even though a stronger-than-expected inflation report heightened expectations the Federal Reserve would raise interest rates again at the end of June”

Many downturns over recent weeks came in late trading after a positive uptick.  Today stocks bounced 40 points higher following positive announcements from Boeing, partly pumped by the delay on Airbus A-380s.  Airbus’s parent company EAD dropped 26% yesterday as investors panicked while Boeing rose 6.5% today following a new Singapore Airlines order for 20 Dreamliners.  Overall trading was mixed with as many stocks rising as falling. 

I still can’t see jumping back in until September.

Today at a senate hearing and in his first post-fed address, Alan Greenspan told the Senate that while the USA has so far been able to absorb the rising cost of fuel, the increase has reached a point where economic growth is being stunted.

He said that American business “to date has largely succeeded in finding productivity improvements that have contained energy costs.” But added that consumers “are struggling with rising gasoline prices

Greenspan’s hope was that Amercans will wean themselves from gasoline dependence through development of ethanol and alternative fuels as well as expanded use of hybrid engines.

The picture above shows the delightful kit that more than 1.6 million, American subscribers have purchased to link up with Vonage, VOIP service.  Drawn by the concept of unlimited long distance calling at a price point of $25.00 a month and a starter package that was typically available for free after rebates, there was little disincentive at the front end to “giving it a try.”

My family did.  Unlike other VOIP offerings, Vonage is do it yourself.  The picture below shows one type of outdoor telephone box that any neophyte attempting to install Vonage service must decipher and modify in order to hook up more than just one phone. 

Online forums found by searching for Vonage in conjunction with a variety of pejorative terms suggests that the company’s subscriber base is far from stable.  Googling “Vonage” and “sucks,” for example, turns up over 200,000 hits.  A quick read of just a few of the stories would have been more than sufficient to discourage even the most risk tolerant of speculators to pass on last week’s Vonage IPO.

As it stands, Vonage stock is off 30% from its initial price of $17.00.  “Going public,” is not a panacea for company ills. A fundamental axiom for a successful IPO is that a company must offer a product that creates customer value. High subscriber turnover suggests dissatisfaction and the dissatisfied multitudes that have disappeared out Vongage’s back door would unanimously agree regarding this IPO, “I told you so.”

So where are the last great oil reserves?

Two of them lay much nearer to home than many people may realize.  Venezuela’s Orinoco Belt is estimated to contain up to 235 billion barrels of recoverable oil but a good old clash between Hugo Chavez’s leftist politics and the capitalist interests of Chevron et al, has staunched the flow to 2.2 million barrels per day from what was once 3.5 million. 

North of the border, Canada’s Athabasca tar sands contain similar reserves.  Now that the price of oil can justify the expense of upgrading the tar sands the major remaining issues concern human capital and infrastructure. Still by 2020 the tar sands are expected to produce 5 million barrels per day.

“Based on an orderly correction in the US current account deficit, the World Bank said today that it expects an annual, 5% effective decline in US currency through 2008.”  At the same time it expects the global economy to expand at a rate of 3.7% in 2006, up from its estimate of 3.2% in late 2005.

Private investors have  bid to take oil pipeline company, Kinder Morgan, private.  Richard Kinder, former Enron executive, owns 20% of the shares and has rallied support of other company executives as well as a cadre of private equity firms including Goldman Sachs, American International Group and Carlyle and Riverstone.

Shares notched up almost 20% today to 100.90 following Kinder’s current bid which represented $100.00 per share. The current bid at $13.4 billion (over $20 billion including debt) is anticipated to move yet hire. Some analysts speculate that interests such as TransCanada and Enbridge may offer competing bids.

Convicted on Thursday May 25th, both Ken Lay and Jeffery Skilling were found guilty of fraud and conspiracy though, as several analysts point out, they neither violated FASB rules nor masterminded the “smoke and mirrors” financial mis-management at Enron.

For example, when they shifted lines of business between business segments with the net effect of reducing the outward appearance of losses, they violated no GAAP (generally accepted accounting principles).  What was at issue however was their non-disclosure of underlying reasons for these changes to investors–a fundamental failure of the level of accountability required by the SEC (in hindsight) and now mandated by Sarbanes Oxley. The Times concludes, “Enron’s financial statements did not conform to the rules. But the convictions of Mr. Lay and Mr. Skilling were based in part on determinations that they failed to give a fair picture, even when they did not violate the rules. That is a precedent that could come back to haunt other executives.” 

How did Lay and Skilling not present a fair picture? A further example of their well-developed pattern of misrepresentation occurred during a summer, 2001 meeting between Lay and analysts where he declared Enron’s liquidity to be “fine” even though he knew at that time about $7 billion in hidden debt, and liquidity temporarily guaranteed only by an emergency $1 billion loan with Enron pipelines offered as collateral.

On another occasion during the same period, despite knowledge that broadband was going way south, that Arthur Anderson had found a $1.2 billion balance sheet oversight and that a major partnership was failing, he declared to the public that Enron stock was “an incredible bargain.”

Now that there is a conviction some argue that Sarbanes Oxley is no longer required to protect the public from corporate corruption. Scott Richardson, an accounting professor at the University of Pennsylvania’s Wharton School of Business concluded, “The regulation isn’t necessary because the legal system is working.”

What the legal judgment does nothing to mitigate however are the following consequences of the Enron debacle: $60 billion in market value wiped out, $2.1 billion in pension plans destroyed, 5,600 jobs gone forever. 

After Trial Quotes:

“I firmly believe I’m innocent of the charges against me. We believe that God in fact is in control and indeed he does work all things for good for those who love the lord.” -  Ken Lay 

“Some things work, some things don’t.” – Jeff Skilling

“You can’t lie to shareholders, you can’t put yourselves in front of your employees’ interests. No matter how rich and powerful you are, you have to play by the rules,” – prosecutor Sean Berkowitz.

“To me, God has spoken to him with this verdict, I guess it gives me a little comfort, but it doesn’t put back my retirement money.” – Sherri Saunders (former Enron employee who lost $1 million in retirement savings).

When the question of whether the recent verdicts were fair was put to a vote on MSNBC, of the 138,200 who voted, 92% said “Yes, they deserve to go to prison,” 3.1% said “No, they clearly showed their innocence,” and 4.6% didn’t know what to believe.  

What do you think?   

AIG received approval earlier this month to provide group insurance coverage to groups of 5 or more individuals in China’s top 3 markets.  This status was upgraded on 5/26/06 to permit issuance of group coverage throughout China.  AIG is the only foreign insurer in China that has not been required to “partner” with a domestic firm.

On 5/10 AIG reported 1st quarter of 2006, net income of $3.2 billion dollars.  Earning of $1.22 per diluted share were down from the $1.45 per share ($3.8 billion) net income of Q1, 2005.

AIG shares jumped 0.92% to 61.47 by the close of Friday’s markets.